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Sh78b IMF facility lifts forex reserves

By Dominic Omondi | May 18th 2020

Kenya’s foreign exchange reserves surged to a four-month high after the government’s account was credited with a Sh78 billion loan from the International Monetary Fund (IMF).

The country’s stock of foreign currency - critical for meeting its external obligations such as imports and payment of external debt - stood at $8,532 million (Sh904 billion) as at May 15, according to Central Bank of Kenya (CBK) data.

It is the highest recording since January 9, when foreign exchange (forex) reserves stood at $8,543 million.  

The IMF extended the Sh78 billion loan to help stabilise the country’s external position.

Kenya has seen increased capital flight since reporting its first Covid-19 case in March, with foreign investors evacuating their wealth to what they perceive as safe havens.

High forex reserves offer substantial relief for the country which has numerous external debt payments falling due.

“This (foreign currency reserves) meets the CBK’s statutory requirement to endeavour to maintain  at  least  four  months  of  import  cover,  and  the East African Community  region’s  convergence  criteria  of  4.5  months  of  import cover,” said CBK in its weekly bulletin.

In addition to the outflows, reduced export and tourism earnings have contributed to the depletion of forex reserves.

Oil prices

However, a record drop in the global prices of crude oil following a slump in demand has eased the pressure on the reserves as close to a third of Kenya’s import bill is oil.   

CBK data shows that current account deficit - the difference between export earnings and import payments - widened to 6.2 per cent of the gross domestic product (GDP) in the 12 months to March.

CBK attributes this to reduced earnings from horticulture and service exports as countries around the world restricted movement to curb the spread of Covid-19. 

“Preliminary data on balance of payments shows that the current account deficit was estimated at 6.2 per cent of GDP in the 12 months to March 2020 compared to 5.8 per cent in the 12 months to December 2019. This reflects lower receipts from horticulture and service exports,” it said.

Despite the increase in forex and CBK remaining active in the market through Open Market Operations, the Shilling lost some ground against the dollar. It was trading at an average of 106.81 against the greenback on Friday, a drop from 106.59 on Thursday.

“The Covid-19 pandemic is expected to significantly reduce growth in 2020, with a large impact on agricultural exports, services, remittances and the financial account thus weakening the external position,” said IMF in a statement.

Kenya has also turned down a debt moratorium offer by the G-20 richer nations to developing countries, with Treasury Cabinet Secretary Ukur Yatani saying the terms were restrictive and would have impacted negatively on credit rating.

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